Lufthansa Board Stares Down Investors in Chairman Dispute

The decision by Deutsche Lufthansa AG’s supervisory board to back Wolfgang Mayrhuber’s aspirations to become chairman against investor opposition shows the hurdles in dismantling the chief executive-to-chairman German model.

Mayrhuber, the German airline’s chief executive officer until 2010, renewed his candidacy yesterday to join the board, less than 12 hours after saying he’d back out following criticism from some shareholders. Mayrhuber, 66, changed his mind after the board voiced its “repeated wish” for him to run and key shareholders gave their blessing, the airline said.

The back and forth in the Lufthansa boardroom laid bare the growing tensions between investors no longer willing to accept the previously common transition of executives to the supervisory panel, and a board that had to offset Mayrhuber’s years of expertise against a code of conduct demanding a clearer demarcation line between the two management spheres.

“There has been considerable confusion, caused by blind interpretation of governance regulation,” Chairman Juergen Weber said today. “This confusion was uncalled for. Wolfgang Mayrhuber has been attacked in a polemic fashion. I repudiate such behavior to the utmost. He has the full trust of the supervisory board, and his achievements are beyond question.”

Keeping Distance

Investors had criticized Mayrhuber’s nomination, saying parts of his strategy as CEO failed and complaining he already held too many similar posts and had not kept his distance from the German airline long enough to comply with acceptable standards of corporate governance. Lufthansa said yesterday such criticism prompted Mayrhuber to drop out of the running, one day before he was due to be voted chairman.

The majority of Lufthansa’s 10 biggest institutional shareholders are international, including Blackrock Inc., which holds 5.4 percent, and Templeton Global Advisors Ltd with a stake of 5 percent, according to the company. The shares more than doubled during Mayrhuber’s tenure, while adding about 3 percent since current CEO Franz took over.

Mayrhuber’s comeback is an unprecedented volte-face in Germany’s corporate history, where investors have become more vocal in their opposition to managers accumulating board mandates. Holding multiple posts was common practice in the previously intertwined corporate landscape known as Germany Inc.

Karl-Ludwig Kley, the CEO of German drug maker Merck KGaA, also stands for election to the supervisory board today. Kley was Lufthansa CFO from 1998 to 2006.

No Future

“We’re speechless,” Ingo Speich, a fund manager at Union Investment, said at the shareholder meeting today. “Mr. Mayrhuber and his former companion Mr. Kley represent the old world of Lufthansa, which must be seen as failed and has no future. Responsible corporate governance calls for you not to accept this nomination.”

A voluntary code of conduct now requires CEOs wait two years before they ascend to the supervisory panel, and caps the number of permitted mandates. Mayrhuber serves as chairman at German chipmaker Infineon Technologies AG, and also sits on the supervisory boards of companies including Munich Re and Bayerische Motoren Werke AG.

Leadership of companies is divided into an executive board overseen by the CEO, and a supervisory board led by a chairman. The supervisory board is split halfway between managers representing the capital side and delegates from trade unions and works councils who voice workers’ demands.

Natural Step

Moving from the executive suite to the supervisory board was previously a natural trajectory at Germany’s largest companies, with long-time leaders such as Siemens AG CEO Heinrich von Pierer seamlessly switching to the senior panel, whose role it is to sign off on strategy, hire and dismiss executives and set their pay.

Activist investors have since criticized the practice, saying a chairman who until recently ran the company is less likely to agree to necessary changes without undermining his own legacy. Mayrhuber was succeeded at Lufthansa by Christoph Franz, who has since embarked on a sweeping overhaul that includes the renewal of the fleet and job cuts.

Germany’s postwar system of cross-shareholdings and interlinked boards began falling apart about a decade ago when banks and insurers started selling their holdings in the nation’s companies, after the government in 2000 got rid of a tax of as much as 54 percent on asset sales.

Old Guard

With the untangling of the corporate web came louder calls from investors to also separate the management layers. Josef Ackermann withdrew plans in November 2011 to immediately head Deutsche Bank AG’s supervisory board after his time as CEO, bowing to shareholder criticism.

Gerhard Cromme, one of the authors of Germany’s current code of corporate conduct, stepped down from the helm of ThyssenKrupp AG’s supervisory board in March, after resisting calls to resign at the steelmaker’s AGM in January in the biggest rebellion in the 14-year history of the merged company.

Today, those CEOs who slipped directly into the role of chairman are a rarer breed in Germany. Among them is Ferdinand Piech of Volkswagen AG, whose family is a key shareholder in the German carmaker. Klaus-Peter Mueller is chairman at Commerzbank AG, where he served as CEO until 2008.

If Mayrhuber is elevated to chairman today, he will face the challenge of injecting his experience while watching his successor pick apart parts of his former strategy. Franz has sold assets including the BMI carrier that failed to blossom under Mayrhuber, and he’s spending billions to renew a fleet that includes dozens of the unpopular Airbus A340.

Ultimately, Mayrhuber’s years of service for the airline make him the right choice, said Ulrich Hocker, president of DSW, Germany’s largest private investors association.

“He’s an expert, and that’s rare in this industry,” Hoecker said. Yesterday’s maneuvers are “a first in Germany, I’ve never seen foreign investors influence supervisory board elections in such a manner.”

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